Perspectives on where our world is heading from a vantage point in Denver, Colorado.

04 August 2009

Abandoned Cities

Forbes has ranked abandoned cities by residential vacancy rates measured by a composite of rental and homeowner owned homes in the 75 largest metropolitan areas as of the fourth-quarter of 2008 per the Census Bureau.

The national rental vacancy rate now stands at 10.1%, up from 9.6% a year ago; homeowner vacancy has edged up from 2.8% to 2.9%.

Detroit's population swelled from 285,000 in 1900 to 990,000 in 1920, reaching a peak of 1.8 million in 1950. But starting in the 1960s, Detroit began a precipitous decline. Detroit's population is now 900,000--half what it was in the middle of the century--and many of its neighborhoods languish in varying states of decay.

On a pedantic note, a weighted average of rental vacancies and home vacancies, based upon the total number of units in each category in each metropolitan area, would have been a more meaningful index of whether a city is abandoned (i.e. what percentage of its housing stock is abandoned) than the crude averaging that Forbes did to combine the indexes.

Percentage decline from peak population would have been a good parallel statistic; where that percentage is higher than the vacancy rate, there has been destroyed housing stock; where it is lower there has been overbuilding in response to growth that didn't happen.

Boston and New York are among the lone bright spots, while Honolulu is the nation's best with a vacancy rate of 5.8% for homes and a scant 0.5% for rentals.

Honolulu is exceptional, with a home vacancy rate much higher than Detroit or Las Vegas, but a very low rental vacancy rate, because much of its housing consists of second homes owned by absentee owners. This also leads Honolulu to be a high end outlier in terms of the relationship between per capita income and housing prices. The high incomes that drive the Honolulu housing market often aren't local.

Boston and New York are more interesting examples. Both are financial centers whose marquee high end employers were hit hard by the financial crisis, and the New York City commercial real estate market, at least, has tanked.

One important factor in New York City is that rent control means that many properties formally classified as rentals have many of the incidents of ownership, such as a disconnect between cost of ownership and the market value of the property. In other words, we would expect rent controlled apartments to behave statistically like owned housing rather typical rentals, with the associated much lower vacancy rates. There are rent controlled properties in Boston as well, IIRC, but they aren't as influential for the market as a whole, because there aren't as many of them.

Both New York City and Boston have also had quite stable populations during periods when the South and West have seen rapid growth, and the Rust Belt has experienced sustained decline.

How to Respond?

In the Rust Belt, the problem is clear. The decline is permanent and will probably get worse before it gets better. The issue is how to downside built areas and government infrastructure to fit current needs, so that residents are stuck with the high taxes necessary to support an oversized infrastructure, which in turn drives marginal residents away to greener pastures elsewhere continuing the vicious circle of economic and population decline. Achieving stability would be a virtue, and is difficult in cities that either never learned, or long ago forgot, how to manage without the manufacturing industry as a base.

In places where the housing boom got ahead of growing demand, producing a housing bubble that popped, the problem is different.

In Colorado, Grand Junction provides a good model. It built up public and private urban capacity in the oil shale boom, while remaining behind the curve in dealing with it. When the oil shale bust hit in 1983, destroying real estate values and demand for private amenities, the regional center stopped building and went dormant. Grand Junction primarily returned to its role as a hub of the Western Slope baseline rural economy, a role it was familiar with filling because the energy boom has not lasted very long.

But, when rising oil prices turned Grand Junction into an energy industry hub two decades later, the public and private urban infrastructure it needed was still in place ready to go. In the intervening two decades, Grand Junction used its abundant supply of cheap housing, commercial space, and industrial space, its depressed labor market, and its unstressed municipal resources let by people hungry for economic development to attract a more diversified economic base led by technology companies and ecotourism.

The peak of the current energy boom in Grand Junction is probably already past, although there hasn't been the same kind of dramatic bust that there was in 1983. But, two decades of economic diversification using its excess capacity, and the likelihood that some of the energy industry growth this time around will be sustained, as looming Peak Oil makes taking a long view towards high cost hydrocarbon resources in Western Colorado look like a good plan, still leave Grand Junction on better footing.

Some epicenters of the housing bust haven't had time to develop as much of an alternative economic base, but a strategy of hibernation until the next boom, rather than permanent downsizing, may still make sense in many of these places.

Vacancies and Homelessness

The raw numbers also make an point that remains evergreen. Homelessness is not primarily a function of insufficient housing stock. There are more than enough vacant rentals and homes to house everyone.

As many as 3.5 million people experience homelessness in a given year (1% of the entire U.S. population or 10% of its poor), and about 842,000 people in any given week. Most were homeless temporarily. The chronically homeless population (those with repeated episodes or who have been homeless for long periods) . . . [was] 123,833 in 2007.

Those who are homeless briefly look like a snapshot of the working class in America generally. The housing crisis, which has produced a record number of foreclosures, has probably had the effect of turning the demographics of the temporarily homeless in a middle class direction. Mostly, these individuals and families are suffering primarily from a shortage of money, and involve householders were are not the strongest contenders in the local job market and a bit short on hope and on the bureaucratic functionality needed to get help and respond to evictions and foreclosures and debt collectors fruitfully.

Government programs like Section 8 rent assistance can used this vacant stock to meet the needs of the "temporarily homeless." But, it often takes a long time to get into the program, many landlords are reluctant to participate for fear of an increased chance of getting a problem tenant who damages the property, annoys neighbors or is too demanding of the landlord. The program can also make eviction more difficult, forcing the landlord to bear some of the program tenant's high default risk. And, Section 8 participation can create a disincentive to find employment that disqualifies a family from the problem. Section 8 also requires a level of bureaucratic competence that the temporarily homeless frequently lack.

A better solution for the temporary homeless needs to cut red tape, develop better incentives, and get people back on their feet and into the secure mainstream of people who have homes and jobs, so that their brief period of homelessness doesn't produce permanent scars in their lives, in many cases the lives of children. Sometimes, where a householder has a job, the problem is as simple as providing a security deposit and first month's rent, to allow the family to get over the hurdle of getting into a conventional, often cheaper than temporary, rental situation. Sometimes more is needed. But, there needs to be intervention that is intermediate between Section 8 and emergency shelters.

I've also long advocated the idea of a tax credit to fully pay for a month or two of storage for the personal property of people who are evicted. Moving that property into a storage unit reduces the harm associated with an eviction and is good for the neighborhood by reducing a sense of disorder and starting a plunder rush. Those who do have personal property that is worth something can keep it while spending far less than the cost of actually finding themselves a new home.

This would take a couple hundred dollars more per eviction than the norm of dumping personal property in the front yard, but would reap huge benefits in terms of retained dignity and order, at a modest cost that the government could afford to subsidize as a form of homelessness transition funding.

The chronically homeless, in contrast, which is another name for vagrant, typically have multiple serious personal problems -- although "housing first" prioritization of those problems has proven to be one of the more cost effective ways to deal with these problems. This highly visible population is much smaller (estimate for Denver are 300-450 chronically homeless individuals). A chronically homeless individual frequently has issues with mental health and substance abuse, often have a criminal record -- at least of minor offenses associated with homelessness itself, and is often resistant to even active efforts from social workers to help - in part out of a sense of autonomy, and in part out of a desire not to have to follow rules that are tough on drinking, drug use or program involvement.

In addition to being cheaper on a case by case basis, and relieving the deep anxiety about societal inequality that the general population feels when confronted by the vagrant population, the chronically homeless are also classic "broken windows" -- visible signs of a community that doesn't care which promotes greater and more serious disorder. So devoting considerable resources towards helping this population, as Mayor Hickenlooper has done in Denver, is good policy.